Importance Of Financial Management

Financial management is important mainly because it helps to make decisions towards the maximization of value of the firm . The importance of financial management to a firm are as follows:

1. Financial Management Helps Setting Clear Goal
Clarity of the goal is important for any firm. Financial management defines the goal of the firm in clear terms (maximization of the shareholders wealth). Setting goal helps to judge whether the decisions taken are in the best interest of the shareholders or not. Financial management also direct the efforts of all functional areas of business towards achieving the goal and facilitates among the functional areas of the firm.

2. Financial Management Helps Efficient Utilization Of Resources
Firms use fixed as well as current assets which involve huge investment. Acquiring and holding assets that do not earn minimum return do not add value to the shareholders. Moreover, wrong decision regarding the purchase and disposal of fixed assets can cause threat to the survival of the firm. The application of financial management techniques (such as capital budgeting techniques) helps to answer the questions like which asset to buy, when to buy and whether to replace the existing asset with new one or not.
The firm also requires current assets for its operation. They absorb significant amount of a firm's resources. Excess holdings of these assets mean inefficient use and inadequate holding exposes the firm into higher risk. Therefore, maintaining proper balance of these assets and financing them from proper sources is a challenge to a firm. Financial management helps to decide what level of current assets is to be maintained in a firm and how to finance them so that these assets are utilized efficiently.
3. Financial Management Helps Deciding Sources Of Financing
Firms collect long-term funds mainly for purchasing permanent assets. The sources of long term finance may be equity shares, preference shares, bond, term loan etc. The firm needs to decide the appropriate mix of these sources and amount of long-term funds; otherwise the firm will have to bear higher cost and expose to higher risk. Financial management (capital structure theories) guides in selecting these sources of financing.

4. Financial Management Helps Making Dividend Decision
Dividend is the return to the shareholders. The firm is not legally obliged to pay dividend to the shareholders. However, how much to pay out of the earning is a vital issue. Financial management (dividend policies and theories) helps a firm to decide how much to pay as dividend and how much to retain in the firm. It also suggests answering questions such as when and in what form (cash dividend or stock dividend) should the dividend be paid?

The importance of financial management is not limited to the managers who make decisions in the firm. Proper financial management will help firms to supply better product to its customers at lower prices, pay higher salary to its employees and still provide greater return to investors.


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